Automated targeted and proportional investment management systems and methods

ABSTRACT

Systems and methods consistent with this invention automatically control investments by forcing liquidations when the investment value exceeds a target amount, and forcing additional investment when the investment value falls below the target amount.

I. RELATED APPLICATIONS

This is a division of application Ser. No. 09/432,099, filed Nov. 2,1999, now U.S. Pat. No. 7,149,714 entitled “Automated Targeted andProportional Investment Management Systems and Methods, which claimsbenefit of priority from U.S. Provisional Application No. 60/123,714,filed Mar. 10, 1999, all of which are incorporated herein by reference.

II. BACKGROUND OF THE INVENTION

This invention relates generally to an automated system for investmentmanagement and more specifically to a computerized system for managingthe investment of capital in markets to receive income and capital gainswhile minimizing the risk of loss of net asset value.

Any form of investment implicates the “risk/reward ratio,” whichrepresents the relationship between the possibilities of profit (reward)and the concomitant possibilities for loss (risk). An investor's abilityto withstand risk usually depends on the person's overall economicposition and economic needs, which in turn sets the amount of reward.The only way to increase the reward for a given risk is to change theratio. Doing so, however, has proven difficult.

The most direct way to increase reward is to buy low and sell high, butfollowing this simple and elegant rule has proven difficult because itrequires predictive powers. It is not possible to know whether themarket was at a high or low until well after the point in time passes.

In addition, human emotion enters into and complicates investmentdecisions. For example, when a stock's price falls, many investors wantto keep the stock hoping to break even or win when the stock's pricerecovers. Similarly, when a stock's price rises, many investors chooseto hold the stock out of fear of selling below the best price. Bothdecisions are seldom wise in the long run.

A sound investment strategy should remove emotion from decision-making,but most investment strategies lack any plan to indicate when to buy andwhen to sell. Some investment models explain when to buy, but not whento sell. For example, a portfolio manager may place a sell order at aspecific price, but the manager generally lacks any quantitative meansto determine the selling price. That value depends as much on guessworkas it does on science.

Many financial planners also recommend “asset allocation models,” suchas 60% equities, 30% fixed income obligations, and 10% cash ormoney-market type funds. The problem remains, however, when to liquidateand when to purchase assets. Moreover, mere asset allocation does notinclude systematic profit taking, only systematic investment to maintainthe proper ratios.

III. SUMMARY OF THE INVENTION

A method, consistent with this invention and executed by a dataprocessing system, for controlling an investment vehicle comprisesdetermining the value of the investment vehicle; comparing thedetermined value against a predefined investment target; making anadditional investment in the investment vehicle automatically if thevalue fails to reach the investment target, the amount of the additionalinvestment depending upon the amount by which the value fails to reachthe investment target; and liquidating part of the investment vehicleautomatically if the value exceeds the investment target, the part ofthe investment vehicle that is liquidated depending upon the amount bywhich the value exceeds the investment target.

IV. BRIEF DESCRIPTION OF THE DRAWINGS

The accompanying drawings, which are incorporated in and constitute apart of this specification, illustrate an embodiment of the inventionand, together with the description, serve to explain the advantages andprinciples of the invention.

In the drawings:

FIG. 1 is a block diagram of a computer system consistent with thisinvention;

FIG. 2 is a flow diagram of a procedure consistent with the invention;

FIG. 3 is a table of values for an example of a procedure consistentwith this invention;

FIG. 4 is another table of values for an example of a procedureconsistent with this invention;

FIGS. 5A and 5B are a spreadsheet of calculations of an example of aprocedure consistent with this invention;

FIGS. 6A and 6B are another spreadsheet of calculations of an example ofa procedure consistent with this invention;

FIG. 7 is yet another spreadsheet of calculations of an example of aprocedure consistent with this invention;

FIG. 8 is still another spreadsheet of calculations of an example of aprocedure consistent with this invention;

FIG. 9 is a graph of calculations of an example of a procedureconsistent with this invention;

FIG. 10 is another graph of calculations of an example of a procedureconsistent with this invention;

FIG. 11 is yet another graph of calculations of an example of aprocedure consistent with this invention;

FIG. 12 is still another spreadsheet of calculations of an example of aprocedure consistent with this invention; and

FIG. 13 is another table of values for an example of a procedureconsistent with this invention.

V. DESCRIPTION OF THE PREFERRED EMBODIMENTS

A. Overview

Reference will now be made in detail to implementations, consistent withthe present invention, that are illustrated in the accompanyingdrawings. Wherever possible, the same reference numbers will be usedthroughout the drawings and the following description to refer to thesame or like parts.

Systems and methods consistent with this invention seek to apply apredefined, and preferably proportional, response to the motion ofparticular equity investments (e.g., stocks, bonds, mutual funds) thatare, by their nature, nonlinear and inherently unstable. Such systemsand methods do so using targets and prescribed responses that requireadditional investment when the equity price drops below the predefinedtarget, and liquidation when the equity price exceeds the target.

FIG. 1 shows a computer system 100 consistent with the invention.Computer system 100 includes a processor 110 and a memory 120 forexecuting the procedures described below. Auxiliary storage 130 canstore the needed programs as well as the data for the differentequities. Input/output ports 140 allow computer system 100 to determine,automatically, the prices of the different equities and to communicatewith investors.

B. Procedures

FIG. 2 shows an example of a procedure 200 consistent with the inventionfor investment management. The procedure begins with the creation of asafety reserve account (Step 210). This requires, in the preferredembodiment, determining a reserve ratio that represents the relationshipbetween the total amount of principal to be used and the annual targetbalance (defined below) to be invested. A conservative value is 20:1,but a more aggressive investor with a higher risk tolerance may dropthat ratio to 10:1.

The reserve account could be kept in some type of money-marketinstruments or short-term bond funds, such as treasury or municipalbonds. Investments into the equity account preferably come from thereserve account, while profits taken from the equity account wouldreturn to the reserve account.

Next, a “target balance” is created to compare to the equity value (Step220). Systems and methods consistent with this invention preferably usea “linear function” to create the target balance. There are severaldifferent ways to create this target balance, the simplest being tostart with a target amount of a set number of dollars (i.e.,$10,000.00), and increment the target by that set number of dollars foreach succeeding year (for example, leaving a target balance of$20,000.00 at the end of the second year, $30,000.00 at the end of thethird year, $40,000.00 at the end of the fourth year, etc.). Using a$10,000.00 target with maximum safety (i.e., a reserve ratio of 20:1),would require a reserve of $200,000.00. Other methods of creating atarget balance are also acceptable.

A computer system then measures the value of the investment at anevaluation cycle point (Step 230). The evaluation cycle point definesthe period (e.g., monthly, yearly, etc.) at which the investmentdecision is evaluated. The investment could be timed so that the cyclesoccur at any desired period, for example, annually, semiannually,quarterly, monthly, weekly or even daily. The only difference is betweenany of these models would be the frequency of measurement and purchase.

Next, the computer system automatically compares the net value of theinvestment account to the target balance (Step 240). If the net valueexceeds the target balance by more than a predetermined amount, thecomputer system liquidates a portion of the investment (Step 250),preferably into the reserve account and preferably in proportion to theamount that the equity value exceeds the target. Hence, when the marketor price hits its top, the system will have taken the maximumliquidation.

Similarly, when the equity value falls below the target balance by morethan the predetermined amount, the computer system forces an investment(Step 260), preferably from the reserve account and preferably inproportion to the amount that the equity balance falls below the target.Hence, at the point that the price has dropped to its lowest value, thissystem would force a maximum investment, even though the investor maynot know that it has dropped to that value.

If neither condition exists, no investment or liquidation occurs (Step270). After whatever action is taken, the system then waits for the nextevaluation cycle point.

Between the two extremes, the investment or liquidation will be dictatedby a relationship, preferably linear, between the equity value and thelinear target for the same point in time. In a rising marketplace, thesize of investment will decrease proportionately with the rise in themarket until the target balance and the equity value are equal, at whichpoint the investment will then be zero. If the equity value continues torise, then investment stops and liquidation begins, with maximumliquidation at the high point for the cycle.

As the value of the equity begins to decline relative to the target, theliquidations decrease until a balance point where the target balance andthe equity value are equal. At the balance point, no action takes place.As the price declines further, purchase of additional equity begins,with the amount of the purchase increasing in proportion to the pricedrops. The low point in the cycle forces a maximum purchase.

All that is required is that at the end of the cycle, in our example,the end of the year, the account value can be determined and compared tothe target. This simple comparison removes all decision making andanalysis from the process.

Generally, the determinations forming the basis for the systems andmethods consistent with this invention can be understood according tothe following relationships: Thus, for a fixed increment,

$\begin{matrix}\left( {{YEAR}\mspace{20mu} 1} \right) & {T_{x} = T_{1}} \\\left( {{{YEAR}\mspace{20mu} 2} +} \right) & \begin{matrix}{T_{x} = {T_{f} + T_{x - 1}}} \\{= {T_{1} + {\left( {x - 1} \right)T_{f}}}}\end{matrix}\end{matrix}$

For a percentage increase,(YEAR 1) T_(x)=T₁(YEAR 2+) T_(x)=T₁×(1+I)^((x−1))

Alternatively,(YEAR 1) T_(x)=T₁(YEAR 2+) T_(x)=T_(x−1)+(T_(f)+T_(f)×(1+I)^((x))where

_(x)=subscript for plan year

P_(x)=Price per share at the beginning of the year (_(x))

T_(l)=fixed amount of initial investment target

T_(f)=fixed amount of annual investment target

I=annual percentage increment over prior Target Value

M=Margin of safety factor

R=Safety reserve

A_(x)=Investment or Redemption on first day of year (_(x))

S_(x)=Number of shares purchased or sold on first day of year (_(x))

Z_(x)=Total number of shares held at the end of year (_(x))

E_(x)=Equity account value on last day of the prior year (_(x))

T_(x)=Target equity value (fixed increment) at the beginning of the year(x)

C. Examples

A method consistent with this invention was applied to the greatestmarket plunge in history to test its efficacy. Graph 300 in FIG. 3 showsthe opening price of the Dow Jones Industrial Average starting the firsttrading day of 1929 and ending with the first trading day of 1999 (or,equivalently, the close on the last trading day of 1998).

Graph 400 in FIG. 4, entitled “Standard and Poor's 500 Stock Index,”provides the exact same data for that index. FIGS. 5A and 5B contain aspreadsheet 500 entitled “INVESTDJ.” This spreadsheet presumes that a$10,000.00 per year target with a $200,000.00 reserve and the firstinvestment was made the first trading day of 1929, little more than tenmonths before the “great crash.”

For purposes of this illustration, Dow Jones Industrial Average isconsidered as a security to illustrate overall market movement. Becausethe crash of 1929 led to more than an 80% decline in value in afour-year period, it was an inopportune time to invest money.Nonetheless, assuming $300.00 a share for a target balance for$10,000.00 resulted in purchase of 33⅓ shares. Those shares suffered a17.17% loss of equity during that year resulting in an account actualequity balance of $8,283.00.

Meeting the target balance of $20,000.00 required an investment of$11,717.00 at the first trading day of 1930. In other words, the systemforced a greater investment as the market price declined. Investing$11,717.00 required a purchase of 47.16 shares due to the drop in theshare price. Thus in 1930, the model would have had 80.49 shares (33.33original shares and 47.16 additional shares), which would have yieldedan end actual equity balance of $13,247.00 at the end of 1930. The netinvestment at that time was $21,717.00 ($10,000.00 initial plus$11,717.00 additional), which meant that the portfolio suffered a lossfor the two years of $8,470.00.

At the beginning of the third year, the target balance became$30,000.00. Subtracting the actual equity balance of $13,247.00 from thetarget of $30,000.00 yields $16,753.00 for the required investment.Dividing this investment by the $164.58 price per share meant a purchaseof an additional 101.79 shares, bringing the total shares held to182.28.

The equity at the end of the third year equals 182.28 shares times$77.90 per share, or $14,200.00. Subtracting that value from the targetbalance of $40,000.00 yields a need for an additional investment of$25,800.00, which purchases 331.20 additional shares. At this point, theportfolio has 513.48 shares.

At the end of the fourth year, the equity balance has fallen again to$30,773.00. Because the target balance is now $50,000.00, an investmentof $19,227.00, or 320.83 shares, is required. The portfolio now has834.31 shares.

At the end of the fifth year, however, the equity balance has risendramatically to $83,347.00. This rise in the stock price has meant thatthe equity now exceeds the $60,000.00 target by $23,347.00, requiringliquidation of that amount (233.71 shares). This, in turn, reduces thetotal number of shares owned to 600.60.

The equity balance at the end of year six would be 600.60 shares×$104.04per share, yielding an equity balance of $62,486.00. Because the targethas now moved to $70,000.00, an additional $7,514.00, or 72.22 shares,must be invested, raising the number of shares in the portfolio to672.82 shares.

At the end of year seven the equity balance is 672.82 shares×$144.13 pershare, or $96,973.00, which is $16,973.00 greater than the targetbalance is $80,000.00. Liquidating $16,973.00 reduces the portfolio by117.76 shares to only 555.05 shares. The remainder of Table 300demonstrates how the methodology results in an average net investmentgain of 6.94%.

FIGS. 6A and 6B show a spreadsheet 600 for values shown in Table 300,except the data used is the opening value of the Standard and Poor's 500Stock Index from the first trading day of 1929 to the first trading dayof 1999 which, in fact, is the closing value of the last trading day of1998. The methodology and explanation of this table parallels that ofTable 300.

FIG. 7 shows a spreadsheet 700 based on hypothetical data from 1929through 1938, using the Standard and Poors 500 Stock Index. This datarepresents the stock market indicator for the worst market crash inhistory and the following ten-year depression. The following decadesassumed repeated duplications of this ten-year economic fiasco.Therefore, this forty-year illustration assumes an economy that has beenin depression for forty years as well with a major stock market crashevery decade. Using the methodology described above, the results areagain favorable, with an annual net investment gain of 11.55%.Admittedly, one possible flaw in this methodology is that every time westart a new cycle, we are jumping from $120.85 a share to $300.00 ashare and the $300.00 a share determines the account value at the end ofthe fortieth.

To offset this anomaly, the model in spreadsheet 800 of FIG. 8 assumesthe Dow Jones Industrial Average from 1929 through 1938, but reverses itfor the next decade, then reverses it again for the third decade, andfinally reverses it again for the fourth decade. Thus, in decades oneand three, the numbers are identical, and in decades two and four, thenumbers are identical. This also creates a longer, more broadly-basedmovement in the market, although there are two years of stable marketconditions at each of the decade break points.

Applying the method consistent with this invention to these modelsshows, by the column entitled “Net Investment to Date” that the largestvalue-occurs in year 36 at an amount of $232,445.00. This would teachthat if the market had behaved in this manner, we would need a ratio of23.2445:1. This anomaly, however, has never occurred, and if did, ournational economy would have crashed long before the 40th year.

FIG. 9 contains a graph 900 entitled “Annual Percentage Change in theDow Jones Industrial Average 1929 to 1998.” This illustrates the degreesof volatility that have occurred during this time period.

FIG. 10 includes a graph 1000 entitled “Amount of Investment Based on$10,000.00 Base Model.” This is also based on the Dow Jones IndustrialAverage and the data used in the previous example.

FIG. 11 includes a graph 1100 entitled “Annual Percentage ChangeInvestments/Profit Taking,” and based on the data from the previousexample. Graph 1200 shows on a percentage basis the profit taking andthe investing as it changes from one year to the next.

FIG. 12 contains a spreadsheet 1200 based on a hypothetical model of along-term tax-exempt mutual fund. Although the model is hypothetical,the percentage of annual income earned is real and the change in sharevalue from one year to the next is also real. The methodology is thesame except for the fact that we now have an equity component in theshare value of the fund and an income component paid out.

FIG. 13 contains a chart 1300 showing the flow of dollars between thedifferent accounts and also possible applications for utilization of thefunds. This is designed for the individual investor. Over a 20-yearperiod, this example needed a 16.7362 ratio of the Safety Reserve to theinvestment unit. The average percentage income returns for the year was7.58%. The average annual investment was $8,368.08 per year and theaverage annual income was $7,429.06 per year.

Working with averages and assuming that the income offset theinvestments shows a net annual investment of $939.02 per year, whichbuilt an end actual equity balance of $201,720.00 at the end of 20years. This is equivalent to a 21.157% average rate of return on theequity investment.

Obviously, systems and methods consistent with this invention can use amyriad of investment vehicles as long as they have an active tradingmarket and a price that can be readily established, and they can be heldfor as long as is necessary. Such vehicles could include stocks meetingthe above criteria, bonds (preferably noncallable and including, but notlimited to, treasury bonds, municipal bonds, corporate bonds and evenjunk bonds), stock, bond or real estate mutual funds, mutual funds ofany nature so long as they are open-ended funds, certain types ofannuities, collectibles, Certificates of Deposit, American depositoryreceipts, real estate investment trusts, and foreign currencies. This,of course, is not all-inclusive, but is instead merely exemplary.

Systems and methods consistent with this invention could be used for avariety of purposes. Examples of persons who could especially benefitare personal injury victims or retirees who have received a lump sumaward and need the safety of principal and income that will grow inproportion to inflation in the future, 401K Plan and IRA participantswho wish to take their profits but not get out of the market, Keoghparticipants, profit sharing participants, and those in profit sharingplans or money purchase pension plans. Also, private investors withlarge profits that are afraid to get out of the market, or those whofinally want to get into the market may also benefit. In addition,virtually any qualified retirement plan, be it corporate or labor unionor a small company, deferred compensation plans, educational endowments,church or temple endowment or building funds and private foundationscould benefit as well. In other words, any investor of any type lookingto limit-their downside risk while keeping their upside potential,altering irrevocably the traditional risk reward ratio.

In the case of any qualified retirement plans that are showing hugeprofits right now, all of the equity holdings could be liquidated,realizing a profit, but without having any taxation on the profitbecause it would be internal to the tax-qualified plan. They could thenstart putting the money back into the plan utilizing this methodology ona much safer basis. They could do this for the entire investment or justcompute the invested capital and take a reasonable rate of return suchas that on treasure bonds etc. or they can lock in their entire profitand leave the rest in and then take their profit and funnel it back inon a safer basis.

1. A data processing system for controlling an investment vehiclecomprising: a memory containing data about the investment vehicle andprograms for managing the investment vehicle; and a central processingunit responding to the programs to: determine a value of the investmentvehicle at predetermined intervals; compare the determined value againsta predefined investment target at the predetermined intervals; make anadditional investment in the investment vehicle automatically if thevalue fails to reach the investment target, the amount of the additionalinvestment depending upon the amount by which the value fails to reachthe investment target; and liquidate part of the investment vehicleautomatically if the value exceeds the investment target, the part ofthe investment vehicle that is liquidated depending upon the amount bywhich the value exceeds the investment target.
 2. The data processingsystem of claim 1, wherein the central processing unit responds to theprograms to increase the target at each of the intervals.
 3. The dataprocessing system of claim 2, wherein the central processing unitresponds to the programs to increase the target by a fixed amount. 4.The data processing system of claim 2, wherein the central processingunit responds to the programs to increase the target by a fixedpercentage.
 5. The data processing system of claim 1, wherein thecentral processing unit responds to the programs to create a liquidaccount.
 6. The data processing system of claim 5, wherein the centralprocessing unit responds to the programs to remove funds from the liquidaccount to make the additional investment.
 7. The data processing systemof claim 5, wherein the central processing unit responds to the programsto add the liquidated funds to the liquid account after liquidating. 8.The data processing system of claim 1, wherein the central processingunit responds to the programs to make an additional investment equal tothe difference between the target and the determined value.
 9. The dataprocessing system of claim 1, wherein the central processing unitresponds to the programs to liquidate a part of the investment vehicleequal to the difference between the determined value and the target. 10.The data processing system of claim 1, wherein the central processingunit responds to the programs to make an additional investment inproportion to the amount that the determined value fails to reach thetarget.
 11. The data processing system of claim 1, wherein the centralprocessing unit responds to the programs to liquidate a part of theinvestment vehicle in proportion to the amount that the determined valueexceeds the target.
 12. A computer readable memory storing programinstructions, which when executed by a processor, manage an investmentvehicle according to a method, the method comprising the steps performedby the processor of: determining a value of the investment vehicle atpredetermined intervals; comparing the determined value against apredefined investment target at the predetermined intervals; making anadditional investment in the investment vehicle automatically if thevalue fails to reach the investment target, the amount of the additionalinvestment depending upon the amount by which the value fails to reachthe investment target; and liquidating part of the investment vehicleautomatically if the value exceeds the investment target, the part ofthe investment vehicle that is liquidated depending upon the amount bywhich the value exceeds the investment target.
 13. The computer readablememory of claim 12, the method further comprising increasing the targetat each of the intervals.
 14. The computer readable memory of claim 13,the method further comprising increasing the target by a fixed amount.15. The computer readable memory of claim 13, the method furthercomprising increasing the target by a fixed percentage.
 16. The computerreadable memory of claim 12, the method further comprising creating aliquid account.
 17. The computer readable memory of claim 16, the methodfurther comprising removing funds from the liquid account to make theadditional investment.
 18. The computer readable memory of claim 16, themethod further comprising adding the liquidated funds to the liquidaccount after liquidating.
 19. The computer readable memory of claim 12,the method further comprising making an additional investment equal tothe difference between the target and the determined value.
 20. Thecomputer readable memory of claim 12, the method further comprisingliquidating a part of the investment vehicle equal to the differencebetween the determined value and the target.
 21. The computer readablememory of claim 12, the method further comprising making an additionalinvestment in proportion to the amount that the determined value failsto reach the target.
 22. The computer readable memory of claim 12, themethod further comprising liquidating a part of the investment vehiclein proportion to the amount that the determined value exceeds thetarget.